Taiwan's Financial Supervisory Commission vice-chairman discusses the regulatory body's top priorities, which include preparations to launch Taiwan's banks into the Chinese market.

Q: What are the Financial Supervisory Commission's (FSC) top priorities for the year ahead?

A: To bolster risk control, we will revise the regulations concerning the sale of banks' financial derivative products. The main principles include: stronger internal controls within banks; the implementation of systems to 'know your customer'; qualifications for personnel involved in selling trust, insurance, derivative or wealth management products; and provisions to suspend certification when regulations are repeatedly violated.

Another top priority is to push through a bill to protect financial consumers (a draft was approved by the Taiwanese cabinet on January 6). The new bill will enable consumers to file complaints for arbitration to an independent institution, helping them to avoid high costs and long delays.

Q: Will Taiwan's banks have difficulties meeting the new Basel III standards?

A: Actually, the capital adequacy ratios for most of Taiwan's domestic banks already exceed the Basel III requirements. The health of our banks is now generally good; the average domestic bank non-performing ratio has declined from 11.74% in March 2001 to 0.70% in November 2010, the average loan coverage ratio is 135% and the average capital adequacy ratio is more than 11%.

We are encouraging banks to make long-term capital management plans – to focus on raising their percentage of common stock and thus improve their Tier 1 capital ratios.

Q: Does the FSC support financial interaction between Taiwan and China?

A: We are cautiously promoting cross-strait financial co-operation. In November 2009, the FSC signed memorandums of understanding for mutual financial supervision with mainland China, covering banking, insurance and securities. Our government also signed the Economic Co-operation Framework Agreement (ECFA) last year.

The memorandums of understanding set in place a system for information exchange and financial supervision for both sides, while the ECFA will allow Taiwan's banks to set up branches in mainland China and mainland banks to launch in Taiwan.

Five Taiwanese banks have already set up branches on the Chinese mainland, while a number of our banks have signed memorandums of understanding on co-operation with mainland Chinese banks – this will help them secure more market information and access to renminbi funds, and provide more financing services for Taiwanese businesses.

Q: Entry into the Chinese market poses risks to Taiwanese clients – how will the FSC manage these risks?

A: Domestic banks are required to have an advance review and FSC approval before they can set up in the Chinese mainland. This process checks for risk control and sets up post-approval regulation.

There is also a ceiling on the investment of domestic banks or financial holding companies (FHCs) on the Chinese mainland of no more than 15% of net worth for banks and 10% for FHCs. Taiwanese bank branches in mainland China are required to use local deposits for most of their loans and investments. This will ensure those branches won't depend too much on domestic capital.

The new regulations mean that the five banks which set up mainland branches in late December must establish comprehensive and robust internal risk-control systems. The memorandums of understanding allow us to send FSC staff to supervise them if necessary. Q: How are you handling the risks involved with the entry of Chinese banks into Taiwan's market, especially given the sensitive political situation?

A: We have approved the applications of three mainland Chinese banks to set up representative offices in Taiwan. They can apply to upgrade to branches after one year. Foreign banks can usually apply directly to establish branches. But we have told Chinese officials that we need to consider the difference in the scale of the two markets – we cannot allow Chinese banks to immediately have high-volume operations here.

After mainland Chinese banks set up branches in Taiwan, the Joint Credit Information Center will rigorously review and strengthen its online controls over credit information on domestic corporations, and individuals and will be able to report any abnormal situations to the FSC.

In addition, the accumulated amount of capital invested by mainland Chinese banks in any individual Taiwanese financial institution will not be able to exceed 5% of already-issued voting shares or total assets. Also, the total investment of all mainland Chinese banks in any particular Taiwanese financial institution will not be permitted to exceed 10% of issued voting shares or total capital.

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